1. Basic Accounting Concepts The basic accounting concepts are referred to as the
fundamental ideas or basic assumptions underlying the theory and practice of financial
accounting. Business Entity concept This concept assumes that business has distinct and
separate entity from its owners. For the purpose of accounting, business and its owners are
to be treated as two separate entities. Business assets and personal assets of the proprietor
and business liabilities and personal liabilities of the proprietor are to be kept separate. Only
business transactions should be recorded in accounting books. Any personal transaction is
to be ignored. Money Measurement concept The concept of money measurement states that
only those transactions and happenings in an organization, which can be expressed in terms
of money are to be recorded in the book of accounts. Also, the records of the transactions
are to be kept not in the physical units but in the monetary units. Any transaction not
expressed in terms of money should
2. 4. 4 not be recorded e.g. Goods purchased can be recorded but loyalty of workers towards
the business cannot be recorded. Going Concern concept The concept of going concern
assumes that a business firm would continue to carry out its operations indefinitely (for a
fairly long period of time) and would not come to an end in the near future. So, difference
must be made in fixed assets and current assets and capital items and revenue items.
Accounting Period concept Accounting period refers to the period of time at the end of which
the financial statements of an enterprise are prepared to know the amount of profits or losses
during that period and to know its financial position i.e. position of its assets and liabilities, at
the end of that period. These financial statements are prepared in the form of Income
statement and Position statement i.e. Statement of Profit and Loss and Balance Sheet.
Generally a period of twelve months is considered an accounting period which may be
calendar year or Government’s financial year commencing with first day of April and ending
with the last day of March next or any other such period. Cost Concept The cost concept
requires that all assets are recorded in the books of accounts at their cost price, which
includes cost of acquisition, transportation, installation and making the asset ready for the
use e.g.an asset purchased for ` 30,000 on which carriage ` 500 has been paid should be
recorded at ` 30,500. Dual Aspect Dual aspect or Duality concept states that every
transaction has a dual or twofold effect on various accounts and should therefore be
recorded at two places e.g. when goods are purchased for cash ,goods are increasing stock
and cash is decreasing ,both of which must be recorded and should be same in books. The
duality principle is commonly expressed in terms of fundamental accounting equation, which
is:
3. 5. 5 Capital + Liabilities = Assets Balance sheet is based on this equation. Revenue
Recognition Revenue is the gross receipts of cash arising from the sale of goods and
services by an enterprise and interest, royalties and dividends etc. According to this concept
of revenue recognition, the revenue for a business transaction should be considered realized
when legal right to receive it arises e.g. When goods are sold ,revenue should be recorded
though the cash is received after a few days or a bill of exchange is received that will mature
after two months. Matching concept According to the matching concept expenses incurred in
an accounting period should be matched with revenues during that period, in order to
calculate the results of business operations in terms of Profit or Loss. Excess of Revenues
over Expenses represent Profit and vice-versa. It follows from this that the revenue and
expenses incurred to earn this revenue must belong to the same accounting period. Full
Disclosure concept This concept requires that all material and relevant facts concerning
financial performance of an enterprise that can affect the decision making by the users of
accounting information must be fully and completely disclosed in the financial statements. If
there is need, some information can be given in the form of footnotes. Consistency concept
This concept states that accounting policies and practices followed by enterprises should be
uniform and consistent over the period of time so that results are comparable. Results are
comparable when the same accounting principles are consistently being applied by different
enterprises for the period under comparison, or the same firm for a number of periods. If
however there is a change in the methods or policies, it must be mentioned.
4. 6. 6 Conservatism concept This concept requires the business to play safe. It means that
business transactions should be recorded in such a manner that profits are not overstated.
All anticipated losses should be accounted for but all unrealised gains should be ignored. It
means that profits are to be recorded only when actually become due, but provisions for any
possible losses must be made. Materiality concept This concept states that accounting
should focus on material facts means important from effect on decision making point of view.
If the item is likely to influence the decision of a reasonably prudent investor or creditor, it
should be regarded as material, and shown in the financial statements i.e. Income Statement
as well as Balance Sheet. Objectivity concept According to this concept, accounting
transactions should be recorded in the manner so that it is free from the bias of accountants
and others. It should not be affected by the prejudices of the persons using this information